Fund managers increase cash holding in long-term funds

Volatility in rupee resulted in weakening of Indian currency by nearly 12% since start of fiscal

Following the volatility in the rupee against the dollar, fixed income fund managers have increased their cash holding in long-term funds. Cash holding in long-term funds were negligible at the start of the fiscal, but now it has gone up to about 20% indicating that fund managers are bearish about the market and are holding back on making new purchases.

The volatility in the rupee against the dollar which began in May resulted in weakening of the Indian currency by nearly 12% since the start of the fiscal. The outlook of the rupee remains bearish and the street awaits concrete measures from the government to arrest the rupee's fall. The weakening rupee is a cause of concern for the bond market as yields have been rising.

“Yes, our cash holding as apercentage of assets under management in Principal Income Fund-long term has gone up in the current month as compared to beginning of April at around 4-8% and May at around 12%. Currently its around 20%. The heightened volatility since mid June in government securities and bond yields due to the global scenario both in terms of US treasury yields and rupee has been the main factor,” said Bekxy Kuriakose, head of fixed income, Principal PNB Mutual Fund.

The yield on the 10-year benchmark 7.16% government bond ended at 7.54% on Friday compared with previous close of 7.47%. The yield was at 7.16% on May 17 when it was auctioned for the first time by the Reserve Bank of India (RBI).

“In bond funds the cash holdings have gone up in the industry as the idea is to reduce average maturity. Average maturity in long-term funds was in the vicinity of 10-12 years in January and currently it may be around 5-7 years,” said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.

Fresh purchases in bonds seems unlikely in the near future. “Fund managers are now taking a wait and watch approach. They will take into account the moves of the government towards the rupee and also how the RBI monetary policy unfolds,” said Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund.

RBI will review the monetary policy later this month and the street is expecting a status quo on key policy rates. “With the renewed depreciation pressure of the rupee and external sector risks likely to become predominant concern of the RBI, rate cut expectations will need to get pushed back,” said  Choudhary.

A status quo by RBI in key policy rates will lead to bond yields moving up further. Besides that Foreign Institutional Investors (FIIs) have been selling their holdings in domestic debt as US bond yields are becoming more attractive for them. In the current fiscal RBI has cut the repo rate just once by 25 basis points in May. The repo rate currently is at 7.25%.